STC

Business Context and Reporting Period

Company: Stewart Information Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: The Company operates in two primary segments: Title Insurance-related services (Title) and Real Estate Information (REI). The Title segment provides title insurance and settlement services, while the REI segment offers electronic data delivery, loan modification services, and property information reports.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 4.3% year-over-year (YoY) to $366.4 million. This was driven by a 171.9% surge in REI revenues ($31.4M vs. $11.5M) due to increased demand for loan modification services. Title revenues remained relatively flat, decreasing 0.3% YoY.
• Profitability Improvement: Net loss attributable to Stewart narrowed significantly to $10.3 million from $29.0 million in Q1 2010. Loss per share improved from $(1.59) to $(0.55).
• Segment Performance: The REI segment generated a pre-tax profit of $16.9 million, compared to $1.5 million in Q1 2010. The Title segment reported a pre-tax loss of $23.3 million, an improvement from a $31.2 million loss in Q1 2010.
• Cash Flow: Operating cash flow turned negative at $(38.6) million, compared to positive $13.6 million in Q1 2010. Management attributes the prior year's positive flow largely to a one-time $50.9 million income tax refund received in Q1 2010.
• Title Losses: Title loss provisions increased to 9.4% of title revenues (from 7.9% in Q1 2010), partially due to a $5.7 million charge related to legal costs for the Citigroup matter.

Guidance, Outlook, and Risks

• Outlook: Management anticipates improved operating results and cash flow in 2011 driven by rate increases in 27 states, higher remittance rates from agencies in 38 states, and continued growth in the REI segment. They expect to continue reducing employee costs and implementing new technology systems.
• Market Risks: The Company faces risks related to mortgage interest rates, which rose in Q1 2011, reducing refinance activity. The real estate market remains challenged by high unemployment and weakened consumer confidence.
• Legal Proceedings:
  • Citigroup Matter: A jury returned a verdict of no damages in favor of Stewart on April 29, 2011, regarding a lawsuit involving title policies in Mexico. Post-verdict motions are pending.
  • Hurst Financial Litigation: Multiple lawsuits in California regarding loans made through Hurst Financial Corporation are ongoing. Mediation was adjourned without settlement, and cases have been coordinated for pretrial purposes.
  • Antitrust Class Actions: 78 complaints have been filed alleging antitrust violations. The Company has obtained dismissals in many jurisdictions, with appeals pending in others. Management does not believe the outcome will materially affect financial condition.
• Liquidity: The Company holds $597.0 million in cash and investments (including statutory reserves). It maintains a $10.0 million bank line of credit with no outstanding borrowings as of March 31, 2011.

Investor Verification Checklist

• Citigroup Verdict Finality: Confirm the status of post-verdict motions in the Citigroup Mexico lawsuit to ensure no further financial exposure.
• REI Revenue Sustainability: Verify if the 171.9% growth in REI revenues is sustainable or dependent on temporary government loan modification programs.
• Title Loss Reserve Adequacy: Review the actuarial assumptions for title loss reserves, particularly given the 9.4% loss ratio and the impact of large claims.
• Cash Flow Normalization: Assess the Company's ability to generate positive operating cash flow without the benefit of the one-time tax refund seen in the prior year.
• Rate Increase Implementation: Monitor the progress of premium rate increases and agency remittance rate modifications across the 27 and 38 states respectively.